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Retail has always been a highly dynamic industry, intensely competitive and fighting for a share of the wider consumer spending pot. This is an industry used to dealing with a constant diet of change. However, the change we are seeing today is far more profound than anything the past has thrown up. We are now seeing by far the most challenging period in retail history. A reshaping of the industry’s structure and economics is unfolding, and most of the real change is yet to happen.

Richardtalksretail is focused on analysing this change, anticipating the implications, and mapping how the key players across the various sectors are dealing with it. The regular Blogs in this public section of the site are a taster of the much more detailed analysis and forecasts in the premium section, reserved for subscribers.

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What you get

Accelerated retail

As we edge towards reopening much of UK non-food retailing it is worth preparing some warnings. The first few days will feature queues of people flocking to stores up and down the country. Talk of sales records will abound. And the relief will be palpable. We all desperately need to feel that normality is around the corner.  But no one should mistake relaxation with a return to where we were. Nor mistake early behaviour with anything that might be sustainable.

While social distancing remains central to staff and customer welfare it will be virtually impossible to trade non-food stores profitably. There will be much lower footfall. Even if average spend rises, it will be unable to compensate for fewer transactions. Costs will be higher from the need to manage footfall inside and externally, and installing safeguarding equipment, screens, sanitisers, cleaning etc instore. The reality of these new trading economics will be set against the gradual end of the very significant “cost holiday” over the recent past. Once retailers have to pay their staff, landlords and suppliers again, viability going forward needs to be judged against lower revenues, a very painful prospect.

The coming 12-18 months will be very hard to read. Against the background of a deep recession, UK retail is set to become much more polarised. Online will be much bigger than it was, growing share from 30% pre-Covid to a little over 40%. This will itself massively increase physical cost of sales and the need to shut physical capacity (already chronic pre-crisis) will be greatly magnified. A much bigger online market will make retail as a whole even more price driven than it already is. And it will act to push margins down further.

This rather apocalyptic outlook will certainly spell the end for many retailers no longer fit for purpose. But it certainly does not mean the end of successful retail businesses. Those retailers who came into this crisis strong will be the winners longer term. Those with clear offers and focused leadership, able to be self-challenging and truly embrace change, not just talk about it, will make good returns.

Much of what happens over the coming months will be misleading. Reading between the lines will be essential. Covid-19 has removed lots of seats around the table and when the music stops, many will be left standing. A leaner, fitter for purpose retail industry will emerge with more room for the winners to thrive.

**  I support retailers and stakeholders with strategic advice. If you think I can help, drop me a line – richard@richardtalksretail.co.uk

 

 

Range editing for retail recovery

Retail entered this crisis in bad shape. The industry was bloated with too many stores, too many websites and oversized ranges. The inevitable consequence was deteriorating trading economics. Restarting will be slow and phased. But when the phasing is complete the dust eventually settles, we will have a materially smaller non-food sector.

Many will not make it but being just a survivor will not be enough. The constant threat of extinction is likely to ensure the leadership team’s eye is more on costs than the imperative, revenue. Revenue should determine what costs are in any business. It defines what is needed, what can and what cannot be cut, and where investment is required. And getting this right is about addressing core customers above all others.

Becoming progressively bloated is the result of decades chasing growth at any price. Many need to jettison the fat: far fewer stores, smaller footprints and the central, pivotal issues – edited ranges. This must be demand-driven and is the heart of any retail business – your core customer and what they want and expect to buy from you.

Looking at the state of the retail nation pre-Corona identifies the winners once the dust has settled. They are businesses that entered this period financially strong with distinctive offers like Primark, Selfridges, Costco, TKMaxx, Reiss, B&M, Home Bargains and Hotel Chocolate. All have very clear customer focus which in turn determines ranging. They have resisted the lure of expanding their offers to attract a wider customer base and generate incremental sales. They understand these incremental sales would adversely impact stock turn, inventory carrying costs, availability, and lead to higher mark downs, all hitting margins.

Whatever your current SKU count, you cannot afford slow-moving items your peripheral customers might want. Ignore your peripheral customers and start giving your core customers the attention they deserve. This is the business that your future depends on. Understanding what they want must drive range editing built around the key price points in each product segment.

Choice is not a function of quantity, but of relevance. The tyranny of too much choice is bad for your customers and your financials. A core part of customer engagement is them trusting the retailer to make the initial choices for them. This is a fundamental prerequisite of success in the emerging market.

 

** Optimising range editing must be evidence based. I support retailers and stakeholders in areas like this, and with strategic advice. If you think I can help, drop me a line – richard@richardtalksretail.co.uk

The trouble with retail real estate

Hammerson sells a bunch of retail assets at a massive discount and cuts its dividend. This reflects a massive systemic issue that doesn’t just face landlords, nor indeed retailers. It pervades our economy across the board. A central issue at the heart of the debt crisis was the role of credit agencies. Being the arbiter of risk on behalf of the very businesses they relied upon for their revenues was a blindingly obvious conflict, bound to end in tears. That system and its conflicted relationships remains unchanged.

Exactly the same situation prevails in property. Professional valuations are made by companies wholly dependent on those property owners for their revenues. This is guaranteed to cause fundamental problems, but almost everyone is in denial. In UK retail, over the past 15 years or more we have seen online increase its share of non-food sales from zero to 30%. Over this same period, total physical selling space has actually increased, albeit more from earlier than recently. Meanwhile, online share growth may have slowed but it’s still just over 10% pa.

The key point here is that UK retail capacity growth is far outstripping our very sluggish or virtually non-existent sales growth. This is the central cause of retail distress. Chronic oversupply. The overwhelming majority of retailers have far too many stores, and most are far too big. Oversupply must mean that real estate is worth far less than it was. But this has barely impacted balance sheets.

Inflated values are used to justify bank support and investment cases across the board. The traditional measure of covenant is now totally redundant but still relied upon, with what will be increasingly disastrous consequences. Landlords, banks and investors continue to use outmoded valuation methods and ignore real trading economics and the brand equity of retail businesses. All this is just beginning to catch up with the various players. It’s going to be extremely painful – denial always is.

Ticking clocks at JLP

How long does it take to become an outstanding retail leader? John Lewis Partnership desperately needs one. The clock is already ticking for Sharon White, JLP’s incoming Executive Chair, and following yesterday’s news it is ticking much faster.

Yesterday was dramatic to say the least. Poor Christmas trading came as no surprise. JLP announces its weekly sales figures and it was clear where they would be. Warnings on profits and the bonus were inevitable.

Of more significance is the departure of Paula Nickolds, what it symbolises, and the way it was handled. This was all about the new structure. Sir Charlie Mayfield indicated that it had been an iterative process and that he had the support of the senior team. He may well have at the outset. But somewhere along the road of those iterations, Rob Collins (at the time they were announced) and Paula Nickolds (I suspect gradually over the past two months or so) have both voted with feet and resigned. The ambiguity around her departure reflects badly on the business.

Losing your two top leaders in normal times would be bad enough. But with a new Executive Chair about start, it is much more so. Then magnifying the significance many times further is the fact that the incoming leader (by definition the senior executive in the company) has no commercial background at all, let alone a retail one. She would and should have relied on those two leaders to accelerate her learning about the business and the industry.

JLP faces the most challenging moment in its history. Fundamental structural and cultural issues will fill what will be a huge agenda. The new leadership structure she will inherit will make addressing these issues far more difficult. With seven direct reports, it has essentially fragmented the responsibility of the executive directors and magnified responsibility of the Executive Chair, the person with the least retail experience. At the very time the Partnership desperately needs to be far more commercial, more focused and to greatly increase the speed and tempo of everything it does, this structure almost seems designed to go in the opposite direction.

Meanwhile, that clock is ticking. It is clear that in 2020 the market will get tighter and trading economics will be further squeezed. It will not wait for JLP to bed in a new way of working. Far reaching decisions need to be made now and they must be right. Retail is unforgiving. No brand is owed a living. The Partnership needs to up its game, and quick.

** I support retailers and stakeholders with strategic advice. If you think I can help, drop me a line – richard@richardtalksretail.co.uk

Next – the exception not the rule

In keeping with tradition, Next kicks off the Christmas Trading Statements season this morning and as ever, many will assume it is an indicator for the sector. And as ever, it wont be. Next’s figures are excellent given the market background of soft demand and wall to wall discounting across the sector. But far from being an industry bellwether, Next is almost always a significant outperformer.

While the current retail malaise is impacting all sectors of the trade, none is impacted more than the middle market. 2020 will be the defining year for both Debenhams and House of Fraser. M&S will cede further ground and given this competitive landscape, John Lewis should be hoovering up some incremental business but it is struggling. The major beneficiary of middle market weakness is Next, fuelled by its Label brands platform – in my view the most significant strategic development from the company in more than a decade.

In general, Christmas Trading Statements have always been unreliable and misleading. They are unaudited, vary in definitions and timeframes from one company to the next, and there are no agreed criteria or rules. And that’s before online is considered. Most retailers have growing online businesses. Returns peak at Christmas with gift buying and are rarely accounted for because the reporting periods pre-date most if not all. So the headline trading numbers are generally inflated. Some of those impressive-looking sales will be going back to customers as refunds – not great for cash flow.

Things are rarely what they seem. Next’s numbers will still look respectable once returns are in. But for the bulk of the market, returns will put Christmas trading into negative territory.

 

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